Gilead, Amgen Q4 Earnings & Weak Outlook Affect Biotech ETFs

The biotech sector stood out last year and the NASDAQ Biotechnology Index delivered a stellar 34% return for 2014.

Despite some temporary glitches and rough trading in between; encouraging industry trends, increasing merger and acquisition activities, several important product approvals and label expansions, ever-increasing health care spending and an aging population led the sector to easily outperform the broader U.S. equity markets (read: 3 Biotech ETF Winners from 2014's Best Performing Sector).

The strong performance continued into the New Year with most of the biotech ETFs trading in the green in the year-to-date frame. However, the industry has started to show some weakness lately. Unlike the third quarter wherein most of the well-known industry players easily managed to beat our estimates on both earnings and revenues, the fourth quarter saw some of them reporting mixed financial results.

The company reported solid fourth-quarter numbers as net income more than quadrupled to an adjusted $3.88 billion from $930 million in the year-ago quarter. Adjusted earnings per share came in at $2.43, easily surpassing the Zacks Consensus Estimate of $2.27. Revenues rose 134.3% to $7.31 billion topping our estimates of $6.69 billion.

Gilead declared its first quarterly dividend of 43 cents, or $1.72 annually, which will be paid from the second quarter of 2015, pending approval. The company will also begin a $15 billion share repurchasing program to be completed within five years.

However, the company said it plans to offer steeper-than-expected discounts on its HCV drugs to health insurers and other group payers which made investors jittery. The high costs of Sovaldi and Harvoni have intensified competition with AbbVie Inc (ABBV) and its much cheaper HCV treatment Viekira Pak in the market. The discounts Gilead plans to offer this year will hurt its top line, leading to a sales estimate of $26 billion to $27 billion from the company for 2015, below the average Wall Street estimate of $28.6 billion.

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